Support Or Interference? How To Add Value As A VC
31 October 2019
Kjartan Rist for Forbes
Venture capital used to be a profession occupied by predominantly self-righteous people with a high opinion of themselves. They considered themselves to be the most important people in the relationship, with little concern for the needs of the entrepreneurs they were investing in, or the huge risks founders were taking – even though their money was quite literally riding on it. Thankfully, this is now changing, and as the industry has grown and gained global recognition, VCs have come to understand that the best route to success is to build close and productive relationships with investee entrepreneurs and to actively support their growth.
With greater competition for the best investments, and ever-increasing demand for higher, more consistent returns, sitting back and waiting for the money to roll in no longer cuts it. Furthermore, the nature of business has changed. In many ways, there has never been a better time to start a company, as underlying technologies such as data analytics, machine learning and AI are all maturing. But on the other hand, starting a business that genuinely gets the most out of these innovations has never been harder, demanding extraordinary people and skills. The VC’s job is the spot those who have what it takes and then ensure they have the support they need to make a success of it.
Money is no longer enough. Fledgling startup teams require help with everything from business development to recruitment, setting up partnerships, orchestrating M&As, expanding internationally, raising funding, developing strategies, and more. And VCs are perfectly placed to help provide it. However, while a lot of VCs say they offer this value-add support with their portfolio companies, very few get it right. Sit back too much, and portfolio companies could miss out on valuable contacts and experience. But take it too far, and you’re interfering where you’re not wanted, and, in a worst-case scenario, could break the relationship.
How do you get it right?
Check alignment upfront: It hasn’t been the norm in startup culture to discuss expectations and values upfront, but this makes all the difference for ensuring that both parties have the same expectations for the relationship. That means discussing upfront the societal impact you want to make, your growth ambitions, how you want to exit, and crucially, how you plan to work together, including the support that founders need and expect – or don’t expect – you to provide.
Tailor support to each entrepreneur: Even a very talented entrepreneur is only going to be 60 to 70 percent there in terms of the skills and knowledge that the business needs, while the rest needs to be covered by co-founders, clever recruiting or value-add investors. But each founder – or founder team – is different, whether that’s due to their background, education or level of experience. The support VCs provide therefore can’t be a one-size-fits-all approach, and you have to be tuned in to where they can most add value. An effective alignment process upfront gives a good idea of where and how you can best support the entrepreneur, but an ongoing dialogue is critical, backed up by best practice and observations from working with numerous companies.
Plug knowledge and network gaps: The main area where VCs can add value is in building a support network around the entrepreneur, using their experience of what is required to scale a company and tapping into their Rolodex of contacts. Simply by pointing founders in the right direction and making smart introductions at the right time, VCs can make a big difference. Taking this approach, we’ve helped organizations to move away from a pure product or vision-based focus, to a more commercial one by bringing in KPIs and go-to-market skills. Or in reverse, we’ve encouraged founders to cut marketing spend to slow growth in order to get the product right. There have also been numerous occasions where we’ve helped to fill HR gaps, often at a senior level, to ensure a better delivery and go-to-market strategy.
Maintain support through ups and downs: As a VC, you need to always remember that you are rarely investing in the finished article, which means there are always aspects that need to be fixed and this is often where we can be most useful. The entrepreneur is the most precious person in the relationship and as investors, we need to do what we can to enable them to build a successful company, particularly when things aren’t going to plan. That means helping founders to stay positive, being solution-orientated and again, maximizing our network to provide options for how to resolve issues.
Open channels of communication: VCs can’t add value if they don’t know what is going on, which is why regular and open communication is vital. We need to know about potential problems sooner rather than later, as that ensures they are easier to fix. That means we are reliant on founders trusting us enough to feel able to convey negative as well as positive news. However, this doesn’t come naturally to some founders, particularly if they haven’t worked with external shareholders before. In these cases, we have to understand their perspective and be willing to invest time in developing a healthy working relationship. This comes from spending time together, being proactive but not overbearing, respecting their time and position, and listening to any concerns they have. Over time they start to open up more.
Become too operational: It is entirely legitimate for founders to be concerned about a loss of operational control or of their investors meddling in things they don’t understand, which is why VCs have to be careful not to cross the line from sharing knowledge to operational interference. In any case, it is simply too time-consuming to be operational across an entire portfolio of companies, so is likely to impact your business as well as that of your portfolio companies. Instead, support should come in the form of linking into your network and drawing on best practice – this usually means startups can deliver something much faster than if they were starting from scratch.
Implement rather than facilitate: Similarly, while many investors talk about being ‘hands-on’, this shouldn’t extend to getting involved in implementation on a day-to-day basis. We should, of course, happy to work alongside founders to get through certain barriers and challenges, but one always needs to be aware that you are there to advise and connect, rather than carry out the full task. The founder should always retain ownership of the processes and organization, but we as investors should be aware of the challenges they face and be relentless in terms of making sure these are overcome.
Try to offer technical input: The same goes for trying to offer input on the technical side of things. In most cases, tech startups are working with highly complex technology, while most VCs have a good, but not particularly in-depth, knowledge of the latest tech. There is a danger, however, that where investors do have domain experience, they may be tempted to lecture founders on where they should be focusing and spending their time. This is dangerous territory, and it usually only causes confusion and conflict.
Value-add venture capital is a relatively new concept, particularly here in Europe, but it is rapidly becoming a natural and integrated part of the venture offering. For the most part, it is hugely welcome, helping to ensure that more startups achieve success and that more VCs are able to deliver consistent returns to their LPs. But as with any change, there will be teething problems, and VCs must ensure they stick to where their help is genuinely needed and appreciated, and don’t step over the line into meddling – however well-meaning that may be.